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GUEST COLUMN

The cash they send proves invaluable

By LENNART BAGE

What's the most important, fastest-growing source of new capital in the developing world? Foreign investment? No. Foreign aid. Wrong again. The correct answer is remittances — the funds migrants abroad send home. Economists have long been aware of the importance of these funds, but in the last decade remittances have become one of the most powerful capital transfer systems in history.

Worldwide, migrants' remittances amount to at least $100 billion annually, with some experts putting the figure as high as $175 billion.

Remittances are especially important in Latin America and the Caribbean, where they amounted to approximately $38 billion last year, almost four times the total seven years ago, and surpassed the combined total of foreign direct investment and official development assistance in several countries.

Moreover, in contrast to other capital flows, remittances have formed a steady safety net that has grown stronger and stronger even in the face of worldwide recession, and one that imposes no burdens of debt on individuals, businesses, or governments.

Remittances are also the ultimate private grass-roots aid program, done by the families themselves. Finally, most remittances go directly to the world's rural poor, who have long been the hardest-to-reach target for traditional aid programs. In short, remittances are a source of capital that both those on the left and the right can love.

However, the remittance system does have a couple of major problems that limit its effectiveness. First, the costs of the transactions are far too high. The typical fee for transferring $200 is approximately 12.5 percent of the total. Second, while remittances are used for very worthwhile purposes — health care, housing, education — very little of the money is being invested to promote the kind of long-term growth the developing world needs. The good news is that both of these problems can be solved without changing the system from grass-roots to top-down.

To lower the costs of transfers, governments and international organizations must expand the choices available to those who send and receive the remittances. That means promoting greater competition among banks and other money transfer agencies.

To promote investment, what's needed is not more government involvement. Instead, the International Fund for Agricultural Development and the Inter-American Development Bank's Multilateral Investment Fund are trying an approach that builds on the strengths of migrant communities and their close connections to the homeland.

he IFAD-MIF initiative starts with the fact that migrants in the developing world have a long tradition of joining up with people from the same community back home to form social clubs. Many of these clubs or hometown associations are sending donations to their towns of origin, working at times with the local municipality, nongovernmental organizations or independently.

Unlike family remittances, collective donations are sent with a specific purpose — usually to improve the town's infrastructure.

While these collective remittances could be the basis for the investment funds the rural poor need, they now constitute only a small fraction of total money sent home. The IFAD-MIF initiative will invest $6 million in several pilot projects in Central America and the Caribbean to change that.

In the United States, the projects will help hometown associations learn more about how collective remittances can promote long-term growth; provide the associations with access to investment resources from IFAD and MIF; and introduce the associations to technologies that can make remittances more efficient.

With a little help from creative partnerships between development organizations and migrant communities, we can start turning remittances into a powerful engine of economic growth.

Lennart Bage is the former head of the Department for International Development Co-operation in Sweden's Ministry for Foreign Affairs.